What are your options when ending a lease early?
Another side of being a broker is when a client contacts you and asks how they can end a lease early. Typically speaking a company is bound to a commercial lease, and many times there might also be a personal guarantee from one of the owners of the company. The responsibility to make payments on the lease go hand in hand with the entire lease term, in some cases for many years. So what happens when a tenant can’t make their lease payments due to changing economic times?
The first option to explore is if the landlord is willing to give some sort of abatement. In tougher economic climates, not only is that particular tenant having a hard time, but others may be as well and a landlord knows it will be difficult to replace that tenant with another. If a landlord is willing to give an abatement know up front that they will ask for proof (financials) that you do indeed need an abatement, and they will expect something in return, such as lengthening the lease with higher increases when you are doing better or a percentage rent clause if you are a retail tenant. Other options include applying a portion of the security deposit to rent, or larger “balloon” rental payments near the end of the term.
What is a tenant to do if the landlord is unwilling to abate rent? Usually a tenant first thinks to sublet. Be aware though subletting does not release the original tenant from the lease, and may also still not provide 100% relief. Most sublets lease for a lower rental rate then a direct lease (partially due to not many concessions/abatements of rents) and a tenant typically will pay a minimum of 6.0% commissions to a broker (sometimes more).
Another option for a tenant looking to end a lease early is to offer a buyout. This is where a tenant goes to the landlord and offers to pay an upfront fee to end the lease, typically significantly less than what the total lease amount would be. The amount of the buyout is dependent upon current market conditions, length remaining on lease, what the landlord paid out in concessions, tenant improvements and brokerage fees. Typically a tenant might expect 6 months’ worth of rent plus any rent that was abated, plus a proration of the tenant improvements given and commissions paid. This is of course dependent upon the current market conditions and other extenuating circumstances at the time of the request (ie: if current market rents are lower, or if it is a slow market and the space may need more time to lease, or if the tenant improvements are unique to the tenant, these all may add costs to the buyout).
Ultimately, a tenant that is looking to end a lease may have several options available to them, and should discuss this with a broker representative that is familiar with structuring these options, as well as current market conditions. No, they won’t be able to make it free, but they should be able to give you options that best fit your business plans and minimize any financial impact.